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A Welcomed Delay


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Delay Grants More Time to Prepare for Assessment

reverse mortgage newsLast week our industry received what many consider an early Valentines gift. Feel the love yet? HUD announced that they would be delaying implementation of the financial assessment which was slated to be in force March 2nd, 2015. The agency states a new effective date can be expected within 30 to 60 days. After numerous delays of the assessment I’m certain many of you watching are raising an eyebrow. Regardless of the nervous and jerky nature of the assessment we can seize upon five benefits of HUD’s postponement.

1- The opportunity to get more borrowers through the gate. Your prospects who are undecided may wish to act now for a more streamlined and less restrictive loan approval process. Our goal is not to instill fear but rather to give them the choice: act now or wait and go through the assessment. We should focus on borrowers who may require a substantial lifetime expectancy set aside who would see more proceeds prior to the assessment.

2- Time to adjust your marketing plan. We should all be asking ourselves ‘am I attracting the right type of borrower?’ Look at your marketing, lead sources and referral network and determine the typical borrower profile that each provides. If you’re presently marketing to areas with low…

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  1. While it is a good idea to go over the Guide again, it is also a good idea to play with the LESA computations to see what their magnitude really is. For those who know how to use the Present Value formula in Excel, here are the keys to calculating the fully funded LESA using the pv function in Excel:

    the Rate is (EIR + MIPR)/12

    the Nper is (12 x TLE)

    the Pmt equals -((1.2 * PC)/12)

    the Fv is 0, and

    the Type is 1.

    Where EIR is the expected interest rate

    MIPR is the annual rate for MIP, currently 1.25%

    TLE is the TALC Life Expectancy of the youngest borrower in years.

    PC is the total of all current, applicable annual Property Charges as verified.

    The same generally holds for HP handheld calculators except the Type is payments will be made at the beginning of each month rather than at the end of the month.

    So if the PC is $2,400, the Expected Interest Rate is 4.75%, and the TALC Life Expectancy [found on Pages 86 and 87 of the Guide in the column labelled “Loan Period 2 (life expectancy) (in years)] is 18.

    The result is $31,813.77. It is important to note that neither the financial situation of the borrower or the value of the home changes anything. So if the PC is the same for a 65 year old with a home valued at $120,000 and another with a home valued at $240,000 you begin to see why Shannon points to seniors who own higher valued homes since the reduction to their principal limit is proportionately less.

    Assuming the same information, what is the amount of a fully funded LESA if the youngest borrower is 74 or 75? This is a trick question since the life is same at 12 years so the fully funded LESA is the same at $24,716.91.

    So what if the facts are the same as the first example except that the expected interest rate is just 4.5%? The fully funded LESA for the 65 year old will $32,405.25 since there is no floor expected interest rate for LESAs as there is for Principal Limits.

    What will the fully funded LESA be if the last illustration changes to a life expectancy of 19 years and keeps everything else the same including the expected interest rate at just 4.5%? The fully funded LESA rises to $33,404.36 for an increase of just $999.11 but why? The reason is that we are adding just one year but it comes at the end of 18 years.

    Present value is a calculation that tells us how much we have to put into the bank today to pay out a specific amount over a definite term where the balance placed into the set aside is growing through an interest factor. In finance it is also referred to as the amounted needed to invest to create a sinking fund.

  2. LO’s…word of advice…spend your time marketing/educating referral partners that can refer you financially responsible borrowers in higher valued homes. And be sure you work for a company that will assist you what is needed to show the underwriters to minimize LESA’s and to help with these insane calculations.

    • Alex,

      So right. If you don’t have the right support people trying to minimize borrower exposure to LESAs, you will lose loans.

      But the marketing need is to find the most likely prospects who will not need LESAs.

  3. Great article and very helpful.

    I have a question about using the PV formula as described in the article. If I substitute MRIS for PC will that calculate the partially-funded set-a-side?

    • Chuck,

      When it comes to the partially funded LESA (Life Expectancy Set Aside), the only factor which changes is the Pmt but the new term MRIS substitutes PC/12 not just PC. The reason is that the MRIS is already a monthly number while the PC must be turned into a monthly amount; so PC has to be divided by 12 since it is the total applicable property charges for a year. As to the Excel pv formula to determine the partially funded LESA, the Pmt is the only factor which changes from the fully funded LESA shown above and it becomes:

      Pmt equals -(1.2 * MRIS)

      Where MRIS is a specifically defined term, “Monthly Residual Income Shortfall.”

      I hope that helps.

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